US based Institute for Energy Economics and Financial Analysis look into the legal and accounting gymnastics surrounding the energy giant’s bankruptcy, and the ramifications for their Australan operations.
In reporting its 1Q2016 results last week, Peabody Energy says it lost US$228m for the three months to March 2016 (before a notional tax credit), a more than doubling of the pretax loss evident in 1Q2015. How management could have deferred Chapter 11 as long as they did seems bizarre given the company has been losing U$80m every month and where net debt rose by US$462m in just the last three months. We review this result given that it shows that the momentum in the coal-mining sector is still deteriorating, rapidly.
Peabody Energy’s 1Q2016 results highlight the magnitude of the problems facing the U.S. domestic and export coal industries. It raises serious questions about Peabody in Australia as well.
Revenues dropped 33 percent year on year (yoy) to US$1.02bn, consistent with the U.S. Energy Information Administration reports that total U.S. coal consumption is down 33% year to date.
Net interest expense rose 22 percent year over year to US$125m for the 1Q2016.
But even if the entire US$6.5bn of net debt was written off by the global banking sector, Peabody would still be losing money. At the EBIT level, Peabody lost US$103m in 1Q2016. As such, the report from McKinsey & Co suggesting massive ongoing financial distress for the U.S. coal-mining sector looks a fair assessment, as is the McKinsey conclusion that 75 percent of the total US$100bn of sector liabilities in place at the end of 2014 could be lost by the end of this decade.
Peabody’s net debt rose by US$462m in just the last three months to US$6.44bn, not discounting another US$2.15bn of unfunded post retirement benefits et al.
IEEFA questions now how the Australian arm of Peabody Energy can remain in a “business as usual” position. The company’s Australian holding company has yet to lodge its 2015 annual results, even though business as usual (as we understand it) required lodgment of these accounts with ASIC by end the April of this year. Given that the 2014 accounts said the company remained solvent only because of ongoing financial support, but with the ultimate parent in Chapter 11, there must be some serious legal or accounting gymnastics involving opaque offshore structures that is allowing the Australian unit to have avoided administration so far. Given the financial leverage, risks of underfunded rehabilitation liabilities and number of Australian jobs involved, maybe this is something our energy minister should investigate rather than just taking management’s word for it.
Tim Buckley is IEEFA director of energy finance studies, Australasia.